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May 20, 2013

Lessons From Losing a Client

Losing a client can lead to insecurity; a simple exercise can get the confidence back

Building any business from scratch is difficult. Building a business where the product is an intangible may be a tougher challenge. This is because you have to motivate a person to buy something they can't touch, smell, hold or see.

Basically, clients make the decision to hire an advisor based on a recommendation from a friend or through conversation with us. However they arrive at their decision, it's important to understand that they need to be comfortable with the advisor's investment philosophy. Although some clients are less interested in the details, the point is, they need to attain a sufficient degree of trust in the advisor before moving forward. Otherwise, assuming the relationship does materialize, it probably won't last long. Recently, I lost what I thought was a good client. In this post, I'll explain why and share the lesson I learned.

When I went independent in April 2007, little did I know that a near collapse of the entire financial system was just around the corner. Building a business in that environment was more difficult on some levels and easier on others. Easier because clients were afraid and were actively seeking advice. Difficult because for every dollar you brought in, some of it was lost to the market. As a whole, in 2008, my clients averaged a 16.25% loss. But just when I thought I was about to cross an AUM threshold, another decline came and that made it tougher to sustain an asset level, especially for a new business like myself.

Recently, one of the clients I gained during this period made a decision to leave. He had been tinkering with buying individual stocks (on paper only) and came to believe that he could earn more with this approach.

While I'll admit that it's possible, I'm also confident that this do-it-yourselfer is going to learn a few tough lessons along the way. After all, why should he, as a novice, be any different than a seasoned investor?

That said, as a result of his exit, I started to think more about my business, so I created a spreadsheet with all clients and the projected revenue from each. I parsed the revenue by type (i.e.; financial planning, direct asset management, indirect asset management, etc). Then I separated them by category: A, B and C. I also calculated the average relationship and account size by category. The results were very interesting.

I'm also going to try and broaden the services clients receive. For example, I'm focusing on expanding financial planning to existing clients.

Here's the takeaway. I hadn't lost a client since 2008. Hence, it took an event like this to recapture my focus. With human nature as it is, sometimes we take our eyes off the ball. Now I plan to be much more proactive in the future and hopefully, I'll never lose sight of that orb again.